Managing Recent Hot Money Inflows in Asia

This paper surveys the nature of capital inflows into Asia since the peak of the US dollar in the first quarter of 2002 and the policy responses to them. Portfolio equity flows have become more volatile and more responsive to global equity market developments. Inflows into local bond markets have become important, although they are often immeasurable, virtual investments through derivative instruments. In the market that shows the highest level of direct non-resident holdings, namely that of Indonesia, these seem quite sensitive to global equity volatility. The most important qualitative change over this period involved bank flows. In particular, foreign bank flows have returned to net inflows after five years of pay-down after the 1997-98 financial crisis. Carry trades, although difficult to measure, appear to have become important, with notable growth in transactions in which a long position in one regional currency is taken against a short position in another one. Carry trades also show great sensitivity to global equity volatility.